Turning Iran’s Currency Crisis Into a Revolution

(Corrects Iran monthly inflation rate in second paragraph
of editorial published Oct. 8.)

Oct. 8 (Bloomberg) -- Amid the usual hyperbolic conspiracy
theories, Iranian President Mahmoud Ahmadinejad said something
incisive in a televised address last week: that the West is
waging economic “war” against Iran.

He’s right, and the Iranian rial’s death spiral is the
first clear sign that we’re on a path to victory. The 40 percent
drop by the rial against the dollar since late September is a
symptom of larger woes: oil exports are at 1 million barrels a
day, down from 2.2 million last year; quarterly oil revenue is
down by about $15 billion a quarter; inflation, officially at 25
percent, is probably closer to 70 percent per month;
unemployment is probably three times higher than the official 12
percent; and the country has been hemorrhaging foreign-currency
reserves, which were estimated at about $110 billion at the end
of 2011.

Critics of sanctions will point out that this economic pain
hasn’t softened up the Tehran leadership’s hard line on its
nuclear program. Iranian officials said Oct. 2 that if current
negotiations falter, they plan to enrich some of its current 20
percent-pure uranium to 60 percent purity as fuel for a
(nonexistent) nuclear submarine fleet, bringing it closer to the
90 percent level necessary for a weapon.

Ignore such bluster: The real test of sanctions’ impact can
be seen in the riots outside Tehran’s main bazaar and elsewhere
in recent days. These weren’t the first signs of public
discontent over the government’s handling of the economy. A wave
of strikes happened this summer; a trade-union group complained
to the government that despite staggering price increases,
“worker’s wages … have gone up by only 13 percent.” (The
regime responded by imprisoning labor activists and sentencing
them to lashings.) There’s been political fallout as well.
Parliament Speaker Ali Larijani said last week that the
Ahmadinejad government was responsible for “80 percent” of the
economic woes.

The idea behind tightening the screws is not that we expect
the regime to see the error of its atomic ambitions. Rather, it
is to stress the economy to the point that Supreme Leader
Ayatollah Ali Khamenei realizes he can no longer afford to see
his people punished for such nuclear dreams.

In that quest, the West might have tapped out the oil
barrel. Perhaps the U.S. could expend diplomatic and political
capital to get greater cooperation from a few of the countries
it says are making “significant” reductions on Iranian oil
imports, such as India, Japan, South Korea and perhaps China.
But pushing Iranian oil sales much below their current monthly
level will be tough.

Instead, it’s time to broaden the war to other fronts:
targeting the entire Iranian energy sector, making it even
harder for companies to sell any nonhumanitarian commercial
goods to Iran, and seeking to deplete or freeze the regime’s
remaining foreign-currency reserves.

Iran’s skyrocketing inflation stems partly from a drop in
imports, which has made meat a luxury and forced the government
to stockpile wheat from eastern Europe and India. This is the
real-world effect of U.S.-led efforts making it more difficult
for companies to do business with Iran’s central bank. How to
turn up that pressure?

First, the U.S. and European Union should expand sanctions
to all Iranian financial institutions. When European leaders
meet in mid-October to discuss Iran, they should agree to end
exceptions that allow Iran’s central bank to use reserves it
holds in European banks for some commercial trade. It should
also ban the so-called U-turn transactions that landed Standard
Chartered Plc in hot water with New York state authorities.

Further, while banning companies from exporting food and
consumer products to Iran would leave the U.S. open to criticism
that it is starving the Iranian people (and probably fracture
relations with EU nations who have so far supported the
sanctions), there are more subtle techniques for tightening the
circle. One is for the EU to prohibit European insurers from
providing any sort of maritime or commercial policies for
exports of goods other than food or medicine to Iran.

On a different tack, the U.S. could push for a global ban
on trade with any entity related to Iranian energy production, a
sector controlled by the regime and its Islamic Revolutionary
Guard Corps (which the U.S. government has blacklisted). This
would be far better than targeting individual companies, as the
Iranians have been creating new fronts and reflagging ships far
faster than the sanctions regime can be expanded. A 2010 United
Nations resolution backed by China and Russia would seem to
allow such global action.

High inflation and a dwindling number of goods in Iran’s
marketplaces may increase popular anger with the regime, but
would somewhat set back the effort to deplete its hard-currency
reserves, which by some estimates could last two more years. To
move that date forward, Mark Dubowitz of the Foundation for the
Defense of Democracies suggests creating a haven program to help
average Iranians move their savings into U.S. bank accounts. The
mullahs would probably fight back with capital controls and
other oppressive measures, but that would put them in the
position of harming the economic interests of their people while
the U.S. was offering to safeguard them.

Sanctions are a long game, and the objective isn’t to
starve the increasingly restive Iranian people but to convince
them that their leaders no longer have their best interests at
heart. Khamenei will only change his ways when he is forced to
choose between his weapons program and the downfall of his
regime. Either of those outcomes would be fine with us.

Today’s highlights: the editors on the economic cost of
political dysfunction; Mark Buchanan on the stupidity of
markets; William D. Cohan on the JPMorgan lawsuit; Edward
Glaeser on why Obama is wrong about the transcontinental
railroad; Albert R. Hunt on revisiting Reagan’s 1980 victory;
Fouad Ajami on how literalists keep their hold on Islam; Camille
Paglia on the caryatids in the Athenian Acropolis.